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Netflix will not raise prices after Disney deal, executive says

By Lisa Richwine

Reuters

Posted:
12/05/2012 11:16:34 AM PST

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A sign is shown at the headquarters of Netflix in Los Gatos, California in this September 20, 2011 file photo. Walt Disney Co agreed December 4, 2012 to give Netflix exclusive TV distribution rights to its movies, becoming the first major studio to stream its movies to TV viewers via Netflix instead of distributing them to HBO, Showtime or other premium TV channels. The deal gives Netflix streaming rights to movies from Disney's live action and animation studios, including those from Pixar, Marvel, and the recently acquired Lucasfilms. REUTERS/Robert Galbraith

NEW YORK -- Netflix (NFLX) doesn't plan to pass along the cost of the rights to Disney movies to subscribers, a senior executive at the video streaming company said on Wednesday.

Los Gatos-based Netflix, which analysts estimate paid more than $350 million for the exclusive rights to stream Disney movies to TV beginning in 2016, is not considering a price increase to help finance the deal, Ted Sarandos, the company's chief content officer, said at the UBS Global Media and Communications Conference.

"We are not contemplating" raising the $8-a-month subscription fee for unlimited online viewing, Sarandos said during an interview with filmmaker Harvey Weinstein.

The deal gives Netflix streaming rights to movies from Disney's live-action and animation studios, including those from Pixar and Marvel.

Netflix suffered from a consumer backlash and stock plunge after it announced an unpopular price increase in July 2011.

But Netflix's rising content costs have raised worries on Wall Street, with some analysts concerned that Netflix paid too much to get Disney's movies. Tony Wible, an analyst with Janney Montgomery Scott, estimated in a report that Netflix paid more than $350 million a year to secure the deal.

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Sarandos called the arrangement with Disney a "game changer" that for the first time will bring new movies from a major Hollywood studio to an Internet-streaming service rather than a cable channel such as HBO or Showtime. Calling Disney a "near-perfect" media company, he said the two began discussing a deal before Disney acquired Lucasfilm and announced plans for new "Star Wars" movies.

Disney talked with other outlets before deciding Netflix was the best platform for its first-run movies, Disney Chief Financial Officer Jay Rasulo said. "This was the highest value deal for us to do. We are thrilled to do it with them," Rasulo said, also speaking at the UBS conference.

Sarandos said Disney's movies will bolster one of Netflix's most popular types of content - animated children's movies. Netflix had a previous deal to stream Disney movies through an agreement with Liberty Media's Starz network, which currently holds the exclusive rights to distribute new Disney films on TV.

"When we looked at the data of when we used to have Starz, the ones that constantly performed for us were those big animated features, lots of repeat viewing," Sarandos said. "It's a nice, safe brand halo when you put your kid in front of an iPad."

In January, Netflix executives played down the importance of Disney movies to its service. At that time, 15 Disney titles including "Toy Story 3" and "Tangled" accounted for about 2 percent of U.S. viewing on the Netflix streaming service, the company said in a quarterly letter to investors.

On Wednesday, Sarandos said Netflix would like to bring more, fresher content from other studios to its service.

Wedbush Securities analyst Michael Pachter said he thought investors' positive reaction to the Disney deal was unwarranted given the price Netflix likely paid. "Ultimately, we think that deals such as the Disney deal could spell doom for Netflix," said Pachter, who rates Netflix "underperform."

"Perhaps most importantly, a long-term and expensive content deal makes Netflix less attractive to potential acquirers," Pachter said in a research note.

The agreement received applause from Weinstein, who called it "probably the biggest content deal in the history of our business." He joked he had used Netflix as a "babysitter" at times with his two-and-a-half-year-old child. "Moving into the family area is a very smart play in terms of you almost cornering the market," Weinstein said.

Netflix already had deals to stream movies with smaller studios including Weinstein's studio, The Weinstein Co., as well as Dreamworks Animation and Relativity Media.

Sarandos said he had not heard any response to the deal from Carl Icahn, the activist investor who recently purchased a nearly 10 percent stake in the company. Netflix adopted a poison pill defense to prevent a takeover.

"This relationship is pretty new," Sarandos said of Icahn. But he said Icahn has been "publicly and privately very supportive" of Netflix.

Netflix shares, which rose 14 percent when the Disney deal was unveiled on Tuesday, gained 1.7 percent at $85.15 in Wednesday afternoon trading on the Nasdaq. Disney shares were up 1 percent at $49.81 on the New York Stock Exchange.